Recently, Southern Company (SO), the top regulated utility stock, shifted to its top gear. The stock rose 2.3% on Tuesday—an increase for the fifth consecutive trading session. Notably, Southern Company stock hit a new all-time of $64.26 on Tuesday. The stock has been trading in the narrow range for the last few months. As a result, the recent surge might have soothed investors.
Southern Company’s rate case approval
Southern Company’s rate case is the main reason behind its positive movement. The Georgia Public Service Commission approved Georgia Power’s 2019 rate case on Tuesday, according to the S&P Global Platts. Georgia Power is Southern Company’s principal subsidiary. The rate case also includes nuclear unit construction cost recovery tariffs, which refer to Plant Vogtle. The rate case approval means higher power rates for Georgia residents for the next few years. Also, the rate case will increase Southern Company’s revenues by $2 billion for the next three years.
Utilities file total revenue requirements for the future with regulators, which is commonly called a “rate case.” Since utilities are a heavily regulated business, regulators have to approve the rate increase.
Southern Company’s revenue growth has largely been subdued in the last few years. In 2018, the utility reported total revenues of $23.5 billion, which were 2% higher than its revenues in 2017. In 2019, Southern Company’s revenues will likely fall to $22.2 billion—a decline of more than 5% YoY.
Southern Company is building the Vogtle nuclear power plant in Georgia. The plant is the only under-construction nuclear power plant in the country. Plant Vogtle is approximately five years behind schedule. The costs have more than doubled the original valuation. Toshiba’s Westinghouse Electric, Plant Vogtle’s main contractor, went bankrupt in 2017, which stalled the project. Several delays and cost overruns have also dented Southern Company’s financials in the last few years. The project’s two reactors will likely be in service by November 2021 and 2022.
According to a report by Georgia Public Service Commission last month, the project is falling further behind schedule. The report noted that the start dates look “significantly challenged” unless the project’s performance improves. The regulator’s red flag might concern investors.
As we noted earlier, electric bills will likely increase starting next month due to the commission’s approval. According to the Atlanta Journal-Constitution, residential customers could see their bills rise annually by more than $175 average after the rate increase is fully phased in.
Southern Company’s stock price action
As a result, investors reacted positively to Southern Company’s rate case approval. So far, the stock has risen 45% this year. In comparison, the Utilities Select Sector SPDR ETF (XLU) has risen more than 21% YTD. The recent strength pushed Southern Company stock into the overbought zone with its RSI (relative strength index) at 72. The current RSI levels suggest a probable reversal in the stock’s direction.
Many top utility stocks are expensive after such an unusual rally this year. Investors might be concerned with their inflated valuations. Falling interest rates drove utility stocks higher this year. However, that might not be the case next year. To learn how utilities are placed for the future, read How Utility Stocks Could Fare in 2020 with No Rate Cuts.